Luxembourg's Ministry of Finance has reported that the international credit rating agency Fitch recently affirmed Luxembourg's credit rating at "AAA" (the best possible rating), with a stable outlook.
Firch confirmed the "AAA" rating with a stable outlook on Friday 15 July 2022, after the closing of the markets. According to Fitch, this rating reflects an exceptionally high income per capita, strong governance indicators and solid public finances despite the difficult macroeconomic context.
In its report, the agency highlighted the good performance of public finances in the context of the COVID-19 pandemic. For the year 2022, Fitch has estimated that the "Energiedesch" and "Solidaritéitspak" measures, amounting to 1.1% of GDP, aimed at mitigating the impact of high inflation, will lead to a widening of the general government deficit to 0.5% of GDP. However, the agency remained confident that the country would be able to gradually return to a balanced situation in the medium term, by implementing a prudent budgetary policy.
After a very strong rebound of 6.9% in 2021, Fitch expects economic growth to slow in 2022. Thus, the agency has revised down its 2022 real GDP growth forecast to 2.3%, from 3.5% in February 2022, and to 2.2% from 2.6% for 2023. Fitch also noted that Luxembourg continues to display the lowest public debt ratio among AAA-rated countries. Public debt fell to 24.4% of GDP at the end of 2021 (24.8% in 2020). Although it may increase further this year to reach 24.6% of GDP, it is expected to stabilise at 25% in 2023-2024 before resuming a gradual downward trajectory.
Moreover, Fitch has estimated that annual inflation would average 8.3% in 2022 before falling back to 2.9% in 2023. The agency particularly welcomed the tripartite agreement reached on 31 March 2022 between the Luxembourg Government, employers and two trade unions, on the delay of the next automatic wage indexation and the principle of a single wage indexation per year (at least until April 2024).
The analysis particularly highlighted the Grand Duchy's strong performance in terms of environmental, social and governance (ESG) criteria in international comparison. The agency noted that in terms of governance, the country stands out for the independence of its institutions and its transparency, a long track record of stable and peaceful political transitions, well-established rights for participation in the political process, strong institutional capacities, effective rule of law and a low level of corruption.
Luxembourg's Minister of Finance, Yuriko Backes, commented: "In the current uncertain context, the renewal of our AAA is excellent news, which I welcome. This best possible rating is a guarantee of confidence and stability, and it illustrates the resilience and performance of our economy, even in times of crisis. Faced with the multiple challenges we are currently facing, a prudent and far-sighted fiscal policy remains the best way forward and will be a determining factor in maintaining our country's prosperity in the medium and long term".
